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12.5. Other Anti-Avoidance Rules

Economic Substance Requirements

Effective from 1 January 2019, Bahrain has implemented economic substance requirements for companies engaged in relevant activities, in order to comply with BEPS Action 5.

Relevant activities subject to the substance requirements include:

  • Banking business;
  • Insurance business;
  • Fund management business;
  • Finance and leasing business;
  • Headquarters business;
  • Shipping business;
  • Investment holding business;
  • Intellectual property business; and
  • Distribution and service center business.

Companies are considered to have complied with the economic substance requirements on the satisfaction of a two-part test.

For the first test, it is required to ensure that the relevant entities are conducting core income-generating activities in Bahrain, which may be demonstrated by meeting the following criteria:

  • Have an adequate number of qualified employees;
  • Incur adequate expenditure; and
  • Have adequate physical assets in Bahrain.

Core income-generating activities are not allowed to be outsourced outside Bahrain by the relevant entity but may be outsourced to providers in Bahrain provided such activities are undertaken within Bahrain with the demonstration of adequate supervision of such activities.

The second test determines whether the direction and management of a relevant entity are located in Bahrain. The test is deemed satisfied if the following conditions are met:

  • Adequate number of meetings of relevant entity’s board of directors in Bahrain;
  • At least a quorum of the board must be physically present for the meetings in Bahrain;
  • Strategic decisions pertaining to the relevant entity must be made at board meetings and recorded in the minutes of the meeting;
  • All records and minutes of meetings of the relevant entity’s must be kept in Bahrain; and
  • Board of directors must collectively possess the necessary knowledge and expertise for discharging their duties.

The relevant entities are required to submit annual reports to verify that they meet the economic substance requirements within three months following the end of the year, however, the deadline for companies whose financial statements for the year 2021 were not audited by 31 March 2022 is extended until mid-August 2022.. The report is required to be submitted to the tax authorities through the International Tax Information Exchange System (ITIES) (prior to 3 May 2021, filings were required through the Commercial Register system known as the SIJILAT).

Failure to comply with the economic substance requirements and/ or submission of annual return may result in consequences such as warning notices, suspension or cancellation of commercial registration, financial penalties, or criminal prosecution.

The above requirements also apply to relevant entities/activities supervised by the Central Bank of Bahrain, which includes banks, financing companies, insurance companies, investment business firms, and fund administrators.

Tax Information Exchange Agreements (TIEAs)

Tax Information Exchange Agreements (TIEAs) provide for the exchange of information on tax matters and Bahrain has concluded TIEAs with 10 countries, including Australia, Canada, Denmark, Faroe Islands, Finland, Greenland, Iceland, India, Norway, Sweden.  

Financial Account Information Reporting and Exchange

On 29 June 2017, Bahrain signed the Common Reporting Standard (CRS) Multilateral Competent Authority Agreement and adopted measures to implement the automatic exchange of financial account information in accordance with the global standard for exchange of information developed by the OECD under the CRS.

Further, Bahrain concluded an Intergovernmental Agreement (IGA) with the United States on 23 January 2017 to improve international tax compliance and implement the U.S. Foreign Account Tax Compliance Act (FATCA).

Ultimate Beneficial Ownership Disclosure

Resident and non-resident entities registered with Bahrain’s Ministry of Industry, Commerce and Tourism (MOICT) and holding a valid Commercial Registration are required to identify and report their ultimate beneficiaries.

Ultimate beneficiaries include individuals that satisfy some or all of the following conditions:

  • Owning or controlling, directly or indirectly, 10% or more of the capital or voting rights of the registered entity;
  • Ultimate effective control over the ownership chain where the registered entity is owned or controlled by another legal person or arrangement;
  • Exercising influence or control through management positions over the decisions of the registered entity; or
  • Any other individual that exercises control over the registered entity.

Beneficial ownership disclosure requirements apply in Bahrain effective 23 July 2020. Registered entities are required to disclose information on their ultimate beneficial owners at the time of applying for the Commercial Registration of the entity, by submitting an electronic form on the SIJILAT system. The information disclosed is valid for one year, however, registered entities are required to confirm or update such information annually, i.e., at the time of renewing the Commercial Registration, or earlier in case of any change within the entity or with respect to the ultimate beneficiaries.

Failure to comply with the requirements may attract the following penalties:

  • Suspension of the Commercial Registration of the entity; or
  • Administrative fines of up to BHD 1,000 per day for the first offense and up to BHD 2,000 per day in case of repeated offense within 3 years of the first offense, provided the total fine does not exceed BHD 50,000.

The maximum administrative fine in relation to all cases may not exceed BHD 100,000.